On Greece Demographics

29 June 2015

by Sami J. Karam

Of all major regions of the world, Europe has the most challenging demographics, combining a stagnant population and a rising dependency ratio. But within Europe, five countries have worse demographics than the European average: Germany, Italy, Portugal, Spain and Greece.

Because of the economic crisis, Greece’s population has stagnated at 11 million, a level first reached in 2001. In addition, Greece’s dependency ratio will be climbing faster than that of Europe as a whole. On UN estimates, a third of the Greek population will be aged 65+ in 2050, compared to a quarter for Europe overall.

Screen Shot 2015-06-29 at 4.09.04 PM

Shown above and below are the dependency ratios (DR) of Greece and of Europe. The Total DR is the ratio of the population aged 0-14 and that aged 65+ to the population aged 15-64. The Child DR is the ratio of the population aged 0-14 to the population aged 15-64. The Old-Age DR is the ratio of the population aged 65 years or over to the population aged 15-64. All ratios are presented as number of dependants per 100 persons of working age (15-64).

Screen Shot 2015-06-29 at 4.14.34 PM

This post uses data from the United Nations Population Division.

Posted in Analysis and Opinion, Demographics, Dependency Ratio, Europe, European Union, Greece | Leave a comment

US GDP: Is 4% Growth Achievable?

18 June 2015

by Sami J. Karam

The Wall Street Journal and The Financial Times say no.

While announcing his presidential campaign Monday, Jeb Bush said:

There is not a reason in the world why we cannot grow at a rate of 4% a year. And that will be my goal as president—4% growth, and the 19 million new jobs that come with it.

As a cruising speed, 4%+ GDP growth is achievable but only under very favorable conditions. Here are the numbers of quarters with 4%+ real GDP growth in the US for some recent decades:

1980-1989    17

1990-1999    16

2000-2009    5

2010-2015     4

and here are the numbers of years of 4%+ real GDP growth:

1980-1989     4

1990-1999     6

2000-2009    1

2010-2015     0

So in the 1980s and 1990s, there were 10 years of 4%+ growth. But those decades benefited from a unique convergence of strong demographics and a technology boom. Looking forward, we still have the technology boom but demographics have turned from tailwinds to headwinds. We used to have a falling dependency ratio and a faster growing population. But we will now have for some time a rising dependency ratio and a slow-growing population.

Note in passing that Jeb Bush sees his economy growing at nearly double the rate of his father’s (2.2% average growth) and brother’s (2.1%).

This column in the Wall Street Journal does an excellent job of subjecting Bush’s “4% and 19 million” targets to the demographic math. The author Josh Zumbrun casts doubt on the plan’s feasibility by showing that the segment of the US population aged 25-54 has stopped growing in the early 2000s (chart). In the three decades to 1997, this segment had grown every year in excess of 1%. In the 1980s, it had grown over 2% per year.

PopulationSlowdownWSJContinues Zumbrun:

Getting to 19 million jobs would require some combination of three things–first, dramatically reversing the decline of prime-age participation, or, second, boosting the employment levels of teenagers and seniors (the latter of which is already climbing, although that partially reflects the economic insecurity of people who would prefer to be retirees). Absent that, the third way to boost the size of the U.S. population and its workforce is with significantly more immigrants. In order to add 19 million people, you’d probably need all three things–lots more teen jobs, lots more participation of prime-age workers and lots more immigrants.

In a similar vein, I had previously looked at the 30-60 age segment and found that it grew steadily from 1976 to 2005 but that it stopped growing in 2005, and that it will remain flat at just over 120 million people until 2020 when it will start growing again. This 15-year flattening of the most economically active age segment explains the slackening in demand seen in many sectors.


Source: populyst, from US Census data

Other factors can mitigate the demographic shortfall but it is doubtful that they will be sufficient to achieve 4% growth. Concludes the WSJ:

The Federal Reserve and Congressional Budget Office both peg the economy’s long-run potential growth at around 2% to 2.3%. Without different demographics, a massive influx of immigrants, or a technological miracle, an entire decade of 4% GDP growth–just mathematically–is a very high goal.

The Financial Times weighed in a couple of days later with an editorial headlined Jeb Bush’s fantasyland of 4 per cent growthLike the Journal, the FT explains its skepticism via low US productivity and poor labor force demographics. It offers a wide range of remedies to alleviate the former through better worker training and infrastructure investments, and the latter through statutory parental leave, more immigration and a higher retirement age. Even so, the paper deems that 4% is likely to remain elusive.

Mr. Bush may be dangling an unrealistic target. But his gimmick will serve a purpose if it concentrates minds on how the US can realistically improve its game.

Related posts:

The Economy’s New Boss: Demographics

Why is GDP Growth so Weak?

It’s the Demography, Stupid

Is America Heading Towards Zero Population Growth?

Posted in 2016 Candidates, Analysis and Opinion, Demographics, Dependency Ratio, Economy, Immigration, Sami Karam, United States, US Economy | Leave a comment

Demography, the Global Emergency

10 June 2015

by Sami J. Karam

It is not an exaggeration to say that world demography is entering uncharted territory. For the first time in a very long time, perhaps the first time ever, the dependency ratios (loosely, the ratio of dependents to workers) of all rich nations and of several emerging markets have started rising and will continue to rise for several decades.

This alone would be enough of a challenge for the world economy. But making things more complicated, it is taking place at the same time as the other big demographic transition of our age, the great population boom in some of the poorest nations of the world.

This combination of rising dependency ratios (DR) in developed countries and exploding populations in some of the poorest emerging countries creates a global emergency and a global opportunity.

The Emergency

The economies of the West and of China have benefited from large demographic tailwinds in the three decades to 2005. In each country, the population was growing and the dependency ratio was declining, a demographic sweet spot for the economy. This allowed the diversion of capital to higher savings and higher investments, creating a virtuous cycle of more capital and more investments. The result was a very substantial rise in prosperity and living standards in the US, Europe, China and other places.

Then, around 2005, the demographic sweet spot started to close. Demography alone is not destiny but it is an important component of destiny. In my view, the other two important components are innovation and institutional strength.

When the US economy hit a demographic wall in the late 2000s, the market and economy crashed but innovation and institutions came to the rescue, the first with the creation and growth of technology companies, the second with the intervention by Congress and the Fed to shore up ailing banks and to pump more liquidity into the economy.

Apple, Gilead Sciences and other innovators merit at least as much credit for America’s post-Lehman recovery as does the Fed’s multiple QE program. Europe’s weaker recovery can be explained by the scarcity of Apple and Gilead equivalents in the EU and by, until recently, an ECB that has been less aggressive than the Fed.

After 2008, the combined effect of innovation and of strong institutions was sufficient to avoid a prolonged recession but not sufficient to produce a fast-growing economy. The missing ingredient, I have argued previously, was the demographic boost which was a key vector in previous recoveries but is nonexistent this time.

To get a clearer picture of where we have been and where we are heading, consider the charts below. The first chart clearly shows the dependency ratios of Japan, Europe and the US bottoming and rising for the next decades.

Japan’s DR bottomed in the 1980s and its economy and markets suffered in the 1990s and 2000s. You may see this timing as nothing more than a coincidence but my own view is that the two are closely related: a bottoming and subsequent rise in the DR made recovery difficult in the 1990s, despite the boom in US and European economies and markets.

So, if the DR is an indicator, the demographic component of growth in the US and Europe has turned from positive before the late 2000s to negative in the present decade and for some time to come.

USA, Europe, Japan Total Dependency Ratios

USA, Europe, Japan Total Dependency Ratios

The second chart (below) shows the dependency ratios for the BRIC countries. Here again, with the notable exception of India, all DRs are bottoming in the present decade and starting a long climb.

China with its one-child policy saw the biggest fall in its DR after 1970 and will now see the steepest climb. The fact that the Chinese economy happens to be weakening at the same time as the DR is bottoming and starting to rise can also be seen by some as a coincidence. But after several such examples spanning several different regions and time periods, even the most committed skeptic ought to consider that there is indeed close causation, not just correlation, between a country’s DR and its GDP.

BRIC Countries Total Dependency Ratios

BRIC Countries Total Dependency Ratios

In the United States, the dependency ratio will rise but the overall size of the population will continue to grow, albeit at a declining rate. This is not true of Europe where the DR will be rising and the population will stagnate at its current size of 740 million and taper off modestly in later decades. Germany, Italy and Russia will see their populations shrink while France and Britain experience low growth.


The headlines on failing demographics are coming fast and furious nowadays. Here are just a few:

German dominance over as demographic crunch worsens worries about the expected shrinkage in Germany’s work force.

The unrealized horrors of population explosion revisits Paul Ehrlich’s The Population Bomb to expose that he was plainly wrong about… well, everything.

Emerging economies demographic challenge worries that the labor force in China and other countries is shrinking but is hopeful that this drag on the economy can be offset by productivity gains.

Mediterranean migrant crossings to Europe top 100,000 in 2015 keeps count of the influx of people, mainly from sub-Saharan Africa, risking their lives to reach Europe by boat.

The last one addresses the second facet of the global emergency: fast population growth in economies that are too weak to absorb this growth.

To get a better idea of what this means, consider that the populations of sub-Saharan Africa and of Europe were roughly equal a decade ago at around 740 million each. But sub-Saharan Africa today counts over 900 million people and in the next 35 years, its population will grow to over 2 billion while Europe’s declines to 710 million. See chart below.

These numbers are from the United Nations Population Division’s medium variant which assumes a rapid decline in the total fertility rate (TFR, number of children per woman) of sub-Saharan Africa. Were that TFR to remain as elevated as it is today, the population of sub-Saharan Africa would rise to over 2.5 billion. Were the TFR to decline faster than expected (UN’s low variant), the sub-Saharan population would still reach 1.8 billion in 2050.

These figures may or may not be inflated. It is difficult to conduct a reliable census in many of these countries. In addition, forecasting over several decades is likely to include erroneous assumptions. For example, if economies don’t improve quickly, the TFR may fall faster than predicted because larger families would encounter greater hardship. Conversely, it may not fall as fast as predicted by the UN. Experience shows that the TFR declines when infant mortality falls and women’s health care improves.

In any case, what is certain is the general direction of demographic growth. Even if the population of sub-Saharan Africa grows to 1.5 billion instead of 2 billion by 2050 (which would be lower than the UN’s low variant), this increase would amount to over 600 million new people, or nearly twice the current population of the United States. These are massive unprecedented numbers.


The Opportunity

Given sufficient choice, comfort and security, an overwhelming majority of people would prefer to stay in their country of birth rather than emigrate to foreign countries where they are sometimes (or often) unwanted and difficult to integrate in already wobbly economies.

The opportunity therefore is to strengthen economic conditions in these poor nations in order to help them absorb the population boom. Or better: in order to help them channel this population growth into a higher standard of living for everyone. This may seem as a daunting and overly optimistic task but we have the encouraging precedents of China and other emerging markets, countries which have translated rapidly falling TFRs into faster economic growth.

There is an opportunity for a symbiotic solution for both the demographic challenge faced by maturing developed nations (and China) and the other very different challenge faced by younger emerging nations such as Nigeria, Ethiopia, India, Pakistan, Bangladesh, Indonesia and the Philippines. These are the countries that are moving into the top 10 population super league by 2050.

Note in the table below the biggest populations ranked by their 2050 sizes. A similar top 10 ranking in 1950 included four European countries (Russia, Germany, Great Britain and Italy) but there will be none left in the top 10 by 2050.

Screen Shot 2015-02-20 at 5.53.58 AM

The opportunity, the solution to the global emergency, is to help these younger countries improve their economies by providing them with capital and helping them strengthen their institutions. To the symbiotic solution, developed nations bring technology, capital and institutional expertise. Emerging nations bring strong demographics and a growing labor force. Working together would over time:

  • create large new demand markets for Western products at a time when domestic demand is weakening.
  • provide food, shelter, health care and jobs to growing populations in sub-Saharan Africa and other countries.
  • strengthen institutions, facilitate capital formation and investments, and increase transparency in governance in emerging markets.
  • mitigate disorganized migration, and lower the risk of instability.

The twin effects of stagnating populations in the West and of booming economies in Africa and Asia create an unprecedented challenge for policy makers. Inaction is no longer a reasonable option. For the West, the costs of inaction include a dearth of demand markets for Western products and services, a surge in clandestine immigration and a heightened risk of terrorism. For young emerging nations, the costs of inaction are poverty and instability made worse by the population boom.

(This article uses data from The United Nations Population Division. The UN’s definition of the dependency ratio is the sum of people under 15 and over 64, divided by the number of people aged 15-64.)

Related posts:

Demographic Megatrends of the 21st Century

The Economy’s New Boss: Demographics

European GDP: What Went Wrong

The BRIC and I

Why is GDP Growth so Weak?

It’s the Demography, Stupid

Is America Heading Towards Zero Population Growth?

Posted in Africa, Analysis and Opinion, Bangladesh, Demographics, Dependency Ratio, Economy, Emerging Markets, Europe, European Union, Germany, Immigration, India, Nigeria, Philippines, Sami Karam, Sub-Saharan | Leave a comment

The Lottery of Birth Place and Time

9 May 2015


“When I attempt to find a simple formula for the period in which I grew up, prior to the First World War, I hope that I convey its fullness by calling it the Golden Age of Security.”

Thus begins the autobiography The World of Yesterday in which the Austrian author Stefan Zweig, born in 1881, recounts his early life in Vienna at the height of the Belle Époque. It was a time of high culture, of prosperity, and of people who believed that war was forever relegated to the past. Then came the shock of WW1, the breakup of the Austro-Hungarian empire, the difficult inter-war period, Zweig’s own forced exile, the horrors of WW2, and finally death. Zweig and his wife committed suicide in Brazil, far from Vienna and very far from the Belle Époque, in early 1942 at a time when the Nazis still looked unbeatable.

There was a life that started and was lived in the sun and with infinite promise for the first 33 years and that slid gradually to ultimate oblivion in the subsequent 27 years. The future is nothing if not unknowable. It turns out that an attempt to extrapolate it from the present can be a foolish exercise, even for someone living in the capital of Austria-Hungary at the zenith of its glory. The path of life is nonlinear.

That is useful to remember when pondering Warren Buffett’s assertion in 2012 that children born in the US are the luckiest people in the world. That showed Buffett’s legendary optimism and his strong faith in the future of the United States. Considering that life expectancy is now about 80 years, this meant that Buffett saw the US as the most peaceful and prosperous country for the remainder of the 21st century.

It is true that adults now living in the United States have been among the luckiest people in the world. By the random lottery of birth, every American living today has found himself in one of the freest, most prosperous countries in human history. Since the birth of the nation 239 years ago, it was often (though not always) luckier to be born here than in any other country on the planet. So if we compare people of the same generations across time, the US-born citizen usually fared better, at least on the peace and prosperity measures if not on all dimensions of the human experience.

But what about the US baby born today vs. the US baby born one hundred years ago, or fifty years ago? When you approach the question from this angle, you can understand Buffett’s optimism. The timing of his birth in 1930 was nearly perfect.

Many unemployed and destitute parents looked at their children in the early 1930s and wondered “my poor child, what will become of you?” As fate would have it however, these children turned out to be the luckiest generation in history.

A baby born in 1935 may have experienced some difficulties in his early years because of the Depression but he was too young to remember much. He was also too young to fight in WW2 which started when he was four and ended when he was ten. In his teen years, the US economy started its long prosperous post-war boom. He was too young at fifteen to fight in the Korean war and too old in his early thirties to be drafted for Vietnam.


Children of the Depression: Things improved later on.

The economy enjoyed a prosperous run from the time he entered the work force until the first oil crisis of 1973 at age 38. He muddled through in his early forties until the Reagan boom started in 1982. That is when he entered a second long prosperous run from age 47 to age 65 in the years 1982-2000. He retired at 65 in the year 2000, then enjoyed his last fifteen years and died this year (assuming a life span of 80 years).

Buffett was born in 1930 and his life span is close to that of someone born in 1935, which explains his strong optimism.

But a ten year difference in either direction, a birth in 1925 or 1945 would have resulted in a different outlook on life. The child born in 1925 remembers the Depression, went to war in WW2 and saw his sons leave for Vietnam. The child born in 1945 was himself drafted for Vietnam but then enjoyed a nice economic run starting in his late thirties until well into his fifties and perhaps until today at age 70.

For an even sharper contrast, consider also a US baby born in 1899. To begin with, his life expectancy was only about 45 years, significantly lower than the 80 years expected for today’s baby. At eighteen, he was drafted for WW1. He witnessed first-hand the war in Europe and lost many friends. At age 30, the stock market crashed and the Depression started. At age 40, WW2 started and his sons went to war. At age seventy, if he was still alive, his grandsons went to Vietnam. It would be understandable if this person felt less positive about future life events than his counterpart born in 1935.

Now consider this man’s contemporary born in Belgium or Germany in 1899. It is the same timeline and the same trials but with far greater impact. His country was destroyed when he was in his teens and destroyed again when he was in his early forties. In between, he struggled with a severe economic depression, with hyperinflation and the rise of Nazism. The war ended when he was 46 and he felt beaten down and defeated. Then things improved gradually, though he lived with the threat of a Soviet invasion until he died. There was good reason for this man to be circumspect about the future.

The time and place of one’s birth are a random lottery. Some generations and nationalities have been far luckier than others and a shift of one decade can significantly impact one’s outlook on life. Which brings us back to the original question: How lucky is a US baby born today?

Buffett’s statement may prove accurate in relative terms. The US faces many challenges in the next few decades but they seem more manageable than the challenges faced by other nations. But what about comparing today’s baby to babies of previous generations? Is he luckier or less lucky? Difficult to say because the future is unknowable. What is certain is that generational luck is real and there will be some future generations which are far luckier and others far less lucky than the one born today.

Among the challenges faced by the current generation are the declining growth of the US population and rising dependency ratio for the next few decades. These demographic factors made for steady economic tailwinds for Buffett’s generation but they will turn into important headwinds for current generations. See related readings below.

In the examples above, the unlucky child of 1899 was born during the Gilded Age and the lucky child of 1935 was born during the Great Depression. It is tempting to see an inverse correlation here, but we must resist doing so because a shift of a few years can have a large impact on one’s life story. Still, a key conclusion is that being born, like Stefan Zweig, in a prosperous place at a prosperous time is no guarantee of a wonderful future existence. Conversely, being born in desperate times does not consign one to a life of unending trials.

Related readings:

It’s the Demography, Stupid

The Economy’s New Boss: Demographics

Is America Heading Towards Zero Population Growth?

Posted in Demographics, Dependency Ratio, Economy, United States, US Economy | Leave a comment

FT: China Faces End of ‘Migrant Miracle’

6 May 2015

The Financial Times describes China’s changing demographics in this new video. Two important changes are a reversal in the dependency ratio (previously discussed here on this site) and a slowdown or end to the ‘migrant miracle’.

Posted in China, Demographics, Dependency Ratio, Urbanization | Leave a comment

Why is GDP Growth so Weak?

29 April 2015


A preliminary reading of US GDP for Q1 2015 came out today at +0.2%, below the 1% expected by economists. The severe winter weather undoubtedly played an important role and the economy may experience a strong rebound in Q2 and Q3 as it did last year (2014 Q1: -2.1% Q2: +4.6%, Q3: +5%). But the recovery since 2009 remains weak compared to preceding ones. As noted in various posts on this site, US demographics are partly responsible.

As shown in the table, in the 23 quarters since the recession ended, this recovery has only seen 7 quarters of 3%+ growth, while the two previous recoveries, after the 1991 and 2001 recessions, saw 13 and 12 quarters of 3%+ growth.

GDPQuarters (1)

During the two previous recoveries, population growth averaged 1% per year but in the current recovery, it has averaged 0.7%. More important, the number of Americans aged 30 to 60 grew steadily from 1978 to 2005 but it has been flatlining at about 122 million people since 2005 and will continue to do so until 2020.

These two factors explain why this recovery has seen fewer strong quarters than those of the 1990s and 2000s.

Related posts:

It’s the Demography, Stupid

The Economy’s New Boss: Demographics

Is America Heading Towards Zero Population Growth?

Posted in Demographics, Dependency Ratio, Economy, United States, US Economy | Leave a comment

Advocate of Early Detection: Podcast with Cardiologist Dr. Michel Accad

22 April 2015


Cardiologist Michel Accad advocates early testing for detection of heart disease.

“We do have very robust technology, non-invasive technology that is simple to use and reliable and that has been established for a long time, to try to detect heart disease before it actually causes any problems. Most of the time when heart disease becomes manifest with symptoms or sudden cardiac arrest or a heart attack, it has been present for many many years before that time. So there is an opportunity to make a diagnosis that is very specific.”   Dr. Michel Accad, Athletic Heart of San Francisco.

Demography is one of the recurrent themes at populyst. In America Heading towards Zero Population Growth, I wrote that the population of the United States is growing at a slowing rate and that, except for immigration, it will not grow at all in the 2030s and 2040s. This prediction may however come into question if US life expectancy increases significantly in the next 20 years.

For this and other reasons, it is useful to periodically examine the progress being made in health and medical practice.

Heart disease remains the number one killer in the United States, accounting for 611,000 of the 2.6 million deaths in 2013. Strokes were responsible for an additional 129,000 fatalities, which means that cardio-vascular ailments led to 29% of all US deaths. By way of comparison, cancer in its various forms accounted for 23% of US deaths.

Death by heart attack is largely an older person phenomenon. According to the Center for Disease Control (CDC), as many as 40% of fatal heart attacks strike people aged over 85 and only 8% strike people aged under 55. This means that a hypothetical increase in US life expectancy, which currently stands at 79 years of age, must probably be accompanied by a measurable reduction in heart disease.

The table, compiled from CDC data, shows the percentage of heart disease and cancer fatalities per age group.

Heart v Cancer

Detection and prevention are seen as essential ways to fight back against cancer. It has become widely accepted that after a certain age, people should undergo routine testing for detection of some cancers even if they appear on the surface to be completely asymptomatic. Some such tests are mammograms and colonoscopies. It is important to note that these tests are most often covered by insurance, a factor which certainly raised their adoption among patients and their doctors.

By contrast, historically, the approach to detection of heart disease has relied primarily on a nebulous review of the usual risk factors, mainly diabetes, blood pressure, cholesterol, smoking, and their frequently attendant obesity. More recently however, a growing number of cardiologists have started advocating proactive testing via CT Scans (aka CAT Scans) of all people over 45 or 50.


Michel Accad, MD.

One of the most vocal among this group is San Francisco-based Dr. Michel Accad, a practicing cardiologist who is also the founder and medical director of Athletic Heart of San Francisco.

In addition to early detection of coronary heart disease and other heart ailments, Dr. Accad also champions a more proactive approach to early detection of any risk of sudden cardiac arrest. Although relatively rare compared to coronary heart disease, sudden cardiac arrest can strike any person of any age during strenuous physical activity.

Dr. Accad’s years of experience coincided with rapid advances in technology and the two have converged today into the following messages:

1- It is a good idea for any person over the age of 45 to get a CT Scan. Because the first manifestation of heart disease can be catastrophic (one third of all heart attacks are fatal), it makes sense to try to detect the presence of any plaque in the arteries.

2- It is a good idea for any person of any age who is active in high-intensity physical activity to undergo tests designed to detect early any risk of sudden cardiac arrest.

As noted above, insurance typically covers cancer tests such as mammograms and colonoscopies. But CT scans designed to detect plaque in the arteries are not generally covered. Perhaps this is due to the fact that treatment of cancer can be far more expensive than treatment of heart disease, at least in its milder form. Dr. Accad notes nonetheless that the cost of CT scans is not prohibitive for a vast majority of patients.

I discussed all of these issues and questions of life expectancy with Dr. Accad in a podcast which you can hear through this link or by clicking the timeline below.


Dr. Accad may be reached through Athletic Heart of San Francisco or through his blog.

Disclosure: Sami Karam and populyst have no business dealings with, and receive no compensation from, Dr. Michel Accad, Athletic Heart of San Francisco or any other parties named in the podcast.

Posted in Demographics, Economy, Health Care, Podcast, United States | Leave a comment

How Refinancings Fueled the Housing Bubble

20 April 2015


The wave of mortgage refinancing by millions of households has distorted the housing market and contributed to the 2000s bubble.

It makes sense for a household to refinance their mortgage when interest rates decline. In addition to lowering monthly payments, refinancing can be highly advantageous if home prices have risen from the time of the initial mortgage.

But are the millions of refinancings also distorting housing’s supply and demand and de facto feeding the real estate bubble? In my view, YES. I make the case below.

In essence, market prices are set at the margin when a small percentage of properties changes hands. When conditions are favorable, prices will trend upward because the supply is small and the demand is higher. But when large numbers of homeowners refinance, they are able to monetize the higher value of their homes without – and this is the key point – adding their homes to the overall supply. When a household refinances their mortgage and takes cash out in the process, they are liquidating part of their property through a private transaction without adding to the official supply.

As an example, say a household has a $400,000 mortgage on a $500,000 home. Five years later, the home is valued at $750,000 and interest rates have dropped from 6% to 4%. The household decides to refinance and to maintain its monthly payment at the same level. Because interest rates are lower, it is able to increase the loan from $400,000 to about $500,000 without increasing its monthly payment. By now, the principal on the old mortgage has dropped to $375,000 and the owner can extract $125,000 in cash during the refinancing process. This amount is the difference between the new mortgage $500,000 minus the principal outstanding on the old mortgage $375,000. So far so good.

But what happened to the homeowner’s equity in his home? On the eve of refinancing, the owner’s equity in his home was $750,000 – $375,000 = $375,000, equivalent to 50% of the new market value.

After refinancing, the owner owes $500,000 and his equity has dropped from $375,000 to $250,000 ($750,000 market value – $500,000 new mortgage), equivalent to 33% of the new market value.

Because the owner now has $125,000 of extra cash, you could say that he “sold” 17% (50%-33%) of his home equity for $125,000. The owner was able to sell one sixth of his house without subjecting his transaction to the scrutiny of the market and without adding to the official supply. This is not a big issue if only a few people refinance their mortgage, but it could, and probably did, distort the normal mechanism of supply and demand when millions of people refinance.

Through refinancing, a large number of households have monetized their home values (or fractions thereof) through private transactions. Had there been an open liquid supply and demand market where existing homeowners actually sold 17% of their homes, the values of all properties would have been reset at lower levels, owing to the existing homes fractional sales.

Further exacerbating the distortion, the household may have taken that $125,000 cash and made a down payment on a second home, giving a further boost to home prices. So, a transaction figure, $125,000, which would have depressed prices under normal supply and demand conditions ended up pushing prices higher.

Screen Shot 2015-04-10 at 3.35.48 PM (2)

Putting this in the right context, we see in the chart above that the volume of existing home sales in the US now has an annual run rate of approximately 4.8 million units. According to the US Census bureau, there are nearly 133 million housing units in the country, which means that 3.6% change hands every year. So the market value of all residential property in America is determined by the marginal 3.6% that transact annually. Yet, using the model above, if we said that 10% of homeowners “sell” say 10% of their homes by refinancing, that would amount to an additional 1.33 million homes sold or a 28% increase which should have been added to the supply, had the fractional sale occurred in the open market rather than through a private transaction between owner and lender.

The general issue is that 20% or more of transactions took place in private deals between owners and lenders without any competitive bidding or the disciplining effect of supply and demand. It is a fair bet that without these refinancings and private deals, the real estate market could have avoided the bubble of the 2000s decade and could skirt the new bubble now threatening in some cities.

Other populyst posts on housing and real estate:

Manhattan Real Estate: A Conversation with Lisa Larson

New Home Sales: Better but Still Historically Weak

US Demographics and Housing

Posted in Economy, Housing, Real Estate, United States, US Economy | Leave a comment

Manhattan Real Estate: A Conversation with Lisa Larson

14 April 2015

Sami Karam speaks with Manhattan’s Lisa Larson, a licensed associate real estate broker with Warburg Realty and a REBNY Deal of the Year award recipient. Topics include the state of the residential market and the boom in supertall tower construction, from the real to the surreal.


“I get asked almost daily: ‘How is the market? What is happening in the market?’ And increasingly, it is getting much harder to define the market as a whole. So I always say: ‘Which market are you talking about?’ The super tall and skinny market [of new high-rise towers in Midtown], we read about every day. It is exciting and we see the towers from every angle. But that is not really the market that most of us live and work in, and buy and sell in. What really makes this job so exciting to me is that there are so many different sub-markets in this city.”   Lisa Larson, Warburg Realty.


Lisa Larson can be reached at Warburg Realty or through her website.

Disclosure: Sami Karam and populyst have no business dealings with, and receive no compensation from, Lisa Larson, Warburg Realty or any other parties named in the podcast.

Posted in Economy, Manhattan, New York, Podcast, Real Estate, United States, US Economy | Leave a comment

New Home Sales: Better but Still Historically Weak

24 March 2015


New home sales for February were stronger than expected, at an annualized pace of 539,000 units vs. 465,000 expected. This is good news because it is the highest number since early 2008. However, the chart below shows that we are still dealing with a depressed single-family housing market.

Screen Shot 2015-03-24 at 10.30.11 AM (2)

First, it is clear that we are very far below the peak recorded near 1.4 million in the mid-2000s. Second, if we dismiss that period as an irrational bubble, it is still a fact that a 539,000 reading is in the bottom half of the historic range of 400K-800K. In fact, if we ignore recessionary periods (shaded areas), new home construction has not been this low since the 1960s when the US population totaled under 200 million vs. about 320 million now and when household size was larger than it is today.

It is true that multi-family construction is now more prominent than in the past and that it mitigates the sluggishness in single-family construction. As seen below, multi-family housing volumes now exceed the high preceding the 2008 crisis.

Screen Shot 2015-03-24 at 11.04.43 AM (2)

But if we use a back of the envelope approach and use a figure in the low 300,000 multi-family annual units as an historic average, we could say that the last multi-family reading is about 150,000 units above average. We could then argue that these 150,000 were ‘shifted’ from single-family homes. (That may be a generous assumption, considering that a large share of these multi-family buildings are destined to be rentals. Nonetheless the higher demand for rentals can also be considered a secular ‘shift’ that should be counted.)

Without this shift in living preferences, we could then argue that single-family sales would have been about 150,000 higher and closer to a 700,000 annual pace. That is a much better figure than 539,000 but still not very robust compared to the past, given low interest rates, the growth in population and the decrease in household size. In my view, keeping these factors in mind, an adjusted figure north of 800,000 single-family units would be closer to the historic norm. We should therefore be looking for a monthly report of at least 650,000 single family homes before we can talk about a return to normal.

In US Housing and Demographics, I made an argument three years ago that the housing market would be weak until at least 2020 because of adverse demographics. So far, it looks like the recent data supports my thesis. Homebuilder stocks have risen since then. This is based in part on optimistic anticipation of greater home sales, and in part on the fact that homebuilders have been quite adept at identifying and directing their efforts at higher growth areas of the country.


Posted in Analysis and Opinion, Demographics, Economy, Housing, Sami Karam, United States, US Economy | 2 Comments